Central bank worried US tariffs could permanently lower GDP and force Canadian companies to relocate
The Bank of Canada’s (BoC) decision to cut interest rates in January was heavily influenced by concerns that a prolonged trade dispute with the US could permanently weaken the economy, according to newly released minutes from its latest policy meeting.
The central bank lowered its key policy rate by 25 basis points to 3% on January 29, marking the sixth consecutive rate cut as it attempted to support economic growth amid mounting uncertainty. A major factor in the decision was US trade policy, with President Donald Trump threatening tariffs on all Canadian imports.
While Trump later agreed to pause most of those tariffs for a month, his administration imposed a 25% tariff on Canadian steel and aluminium just days later. The uncertainty surrounding trade relations with the US led the BoC’s governing council to conclude that the impact on Canada’s GDP could be lasting.
"It was clear that a protracted trade conflict would lead to a decline in economic activity," the minutes stated. "Governing Council members also noted that the adverse impact on the level of GDP would be permanent, and the growth of GDP would be reduced until the Canadian economy adjusts to the tariffs."
With the US accounting for 75% of Canada’s exports, any sustained trade disruption would have far-reaching consequences. The BoC also factored in the possibility of Canada retaliating with its own tariffs, a move that could push inflation higher.
Despite inflation remaining within the BoC’s 1-3% target range for the past six months, the broader economy has been struggling. The rate cut was meant to provide support amid slowing growth, but the BoC acknowledged that uncertainty surrounding US trade policy made forecasting difficult.
"Members acknowledged that it was impossible to predict what would happen with US trade policy," the minutes said.
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The BoC also warned that uncertainty over trade policy was already affecting business decisions. The minutes noted that some Canadian businesses were considering relocating operations to the US to avoid potential trade restrictions.
A prolonged tariff dispute could weaken the Canadian dollar, disrupt supply chains, and reduce investment in key sectors, the council warned. Capital flight and reduced competitiveness were also cited as risks that could further strain the economy.
The BoC’s governing council, which recently appointed a new external deputy governor, said it will closely monitor the impact of tariffs on supply chains and business activity.
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